As a company grows it is possible to predict future evolutions and revolutions which will be brought about by the increasing complexity that comes with adding employees, customers, product lines, locations, etc. Growth comes with increased business infrastructure to sustain the increased demand. What does changing market dynamics mean? For a company to grow successfully it requires that three key factors: an increasing and nurturing number of capable leaders; a scalable infrastructure; and being able to navigate market dynamics. Every business needs to ensure that they have all these factors catered for to avoid facing barriers to growth.
When the market dynamics are in your favor, they cover up a lot of mistakes. When the tide turns against you, all your weaknesses tend to be exposed. Here is what to look out for as revenues grows:
- Between startup and the first million or two in revenue
There is an important sequence of focus when it comes to your financial metrics. When starting a business it is key to focus all your efforts on growing revenue up to about your first or two million. The priority is in obtaining a product/service market fit. To fund your operations you need to rely mainly on family and friends (or fools!). At this stage business owners should not focus on generating cash from the operations.
- $ 1 million to $ 10 million in revenue
This is the time to focus internally on a good internal culture that promotes a spirit of teamwork, open communication and scalable infrastructure that will pay off in the long term. The mistake most senior teams make at this stage of between $ 1 million to $ 10 million in revenue is that they tend to focus externally on amassing new business.
This is the time that the organization needs to on cash. Growing a business requires a lot of cash and given that the revenues will be growing tenfold in size, the demands for cash will soar.
- More than $ 10 million in revenue
As the revenues grow and scale above $ 10 million, it comes with a lot of business process complexities that may lead to firefighting as senior management shifts attention inwards. This should be the time for the team to focus and stay in touch with the customers (marketplace) so that they can stay ahead of competition.
This is when the business model needs to be reviewed to ensure that it is generating sufficient cash for the company to keep growing. The cash model and cycle should be efficient at bringing in cash after each spend. As the organization crosses $ 10 million in revenue, new internal and external challenges emerge. Externally, your organization is on more radar screens, alerting competitors to your threats as individual customer orders grow in size they start demanding discounts so that they can remain loyal as they get enticing offers from your competitors.
The business growth trajectory can be hampered by the failure to address the increased competitive pressures that build (and erode margins) as you scale the business. What does changing market dynamics mean? At this point in time, the company needs to have enough cash war chest because would want to take away business from you or conserve their market share.
At the same time, there is a tendency for costs to rise faster than revenue due to increased internal organizational complexities. All of these changes lead to an organization’s gross margin to start decreasing. As the gross margin reduces, the organization is starved of the extra money it needs in order to invest in infrastructure, like accounting systems and training. This inadequate creates a snowball effect of further costly errors as the company passes the $ 25 million mark.
Erosion in Gross Margins
To prevent erosion in your margins, it’s critical that you maintain a clear value proposition in the market. Consequently, the company must continually look at ways to reduce costs by reviewing and automating internal processes. Organizations that are successful at maintaining a clear value proposition in the market and managing their costs will experience an increase in their gross margins increase during this stage of growth, giving them the surplus cash they need to fund infrastructure, training, marketing, R& D, etc.
By the time it reaches $ 50 million in revenue, an organization should have enough experience and a strong enough position in the market to predict profitability accurately. They should keep abreast with the market trends and changes in customer need to be able to continuously iterate their products to capture these changing preferences. The top management should not lose touch with customers and should strive to be customer-facing as the solution is not in the building but out the with the market.
What does changing market dynamics mean? It is means nurturing leaders that are able to build a predictable revenue and profit business model in this very uncertain marketplace. It is this ability to predict the happenings in the local and global environment supported by effective processes that are ultimately the key to growing an organization that attracts and keeps top talent; creates products and services that satisfy customer needs; and generates significant returns on investment.
Growing a business is a dynamic process as the leadership team navigates the cycles and revolutions of growth. To remedy the challenges that come with growing the company nurture leaders throughout the organization; continually develop scalable infrastructure that meets the demands that come with growth, and keep abreast of market dynamics that affect the business.